John is a mortgage broker from Motto Mortgage. In this episode, John gives a walkthrough on loans and how to get a loan to buy a property.
To avoid paying for private mortgage insurance (PMI), a 20% down payment is recommended. The PMI is dependent on your down payment, credit score, and the equity you have on your property.
The minimum down payment for a conventional loan with a conforming loan amount is 3%. It’s 5% for non-conforming and 3.5% for FHA.
The downside of an FHA loan is the PMI is for the life of the loan. You would have to refinance or sell the property to get rid of it.
PMI is not tax-deductible and the amount varies. For example, for a 680 credit score, an FHA loan for the purchase of a $500,000 property with a 3.5% down payment would require $250-350 a month.
The threshold for conforming loans is around $510,000, if you go up to $765,000, it would be considered a jumbo loan.
Homes are becoming more affordable for buyers as the limit has been going up for years.
Big banks are more competitive than a mortgage broker, so John usually deals with conforming and high balance loans.
You can get a better interest rate depending on your down payment. Usually, the rate becomes better in increments of 5, like 5%, 10%, 15%, and so forth. But it stops when you reach 40-50% down payment.
For PMI, it drops for every 1% more that you put in down payment.
For credit score, the PMI changes for every 10 points.
The FHA credit score requirement is 580. But with our current environment, some banks require 620.
A conventional loan requires 620, but now it might be 640. A jumbo loan requires 720.
If you had 744, the interest rate would be the best except for PMI.
Even if you saved up the money for the down payment, the most important thing is still being able to show that you have the income to qualify for the loan.
Your DTI needs to be 50% or lower to qualify for a conventional loan. For FHA, it has to be 56.99% or lower.
For those who are self-employed, because people write off their business expenses, your net income instead of your gross income will be used for the loan.
To show proof of income, you might be asked to show your W-2 and tax returns for the past 2 years including pay stubs for the most recent 30 days.
If there’s a year you didn’t pay taxes, then you would have to file your taxes for that year first.
For those who are self-employed, you can show your business tax returns. You also have to be able to show income for 2 years to be able to qualify.
Due to COVID-19, you have to show liquidity for 6-9 months principal, interest, taxes, and insurance (PITI).
Reserves can be shown through retirement accounts, stocks, or anything you put money in.
If you switched jobs to a different industry in the past year, you’d need to show 2 years of experience in the same industry.
If you took a year off work then went back to work, you still can get a loan as long as you have a good explanation.
But if you have a gap of 3 months or less in your employment, you wouldn’t get questioned anymore as they assumed you were looking for a job.
Usually, they will check 2 months’ worth of bank statements.
Gifts between family members are fine. The FHA requires that you show the bank statements from both your family member and yours. You have to show the money left their account and was deposited into yours.
For conventional loans, all you need is a copy of the canceled check.
If the money is from a friend, you have to document the friendship.
For residential loans, you need to show a gift letter. The gift can be sent directly to escrow to save on the paperwork.
Once the lowest offer is accepted, you need to sign off loan disclosures.
You get a loan estimate showing interest rates, multiple payments, and estimated fees.
The underwriter then looks at all the documents submitted including proof of income, bank statements, etc. That could take between 3 days to a week.
After that, you get a conditional approval. You just have to fulfill those conditions which could be escrow conditions, updated pay stubs, or paperwork from the buyer or real estate agents.
Once you meet all those conditions, you get the clearance to close the loan.
The closing process involves getting a loan box made, signed, and delivered. This could take 1-2 days.
If there is no problem with the buyer and everything is super simple, you can close the loan within 15 days, or even less.
A rush appraisal can be ordered and it could cost $100 depending on the price of the property. With that, you could get an appraisal in 2 days.
The longest parts of getting a loan are usually the underwriting and the negotiation on the real estate side.
If the appraisal is lower than your purchase price, then it’s up to the buyer and seller to agree on who will make up the difference.
You can make a rebuttal on the appraiser, but they most likely have a good track record. So it may not work.
For properties listed as the primary residence, you have to move within 3 months and live there for at least 12 months.
You can get a loan if you have U.S. citizenship or a green card.
There’s also a list of work visas that can qualify. There are also non-qualified mortgage loans for those with International Tax ID numbers.
This is for those who served in the military or the U.S. Reserve.
You can get a loan with very little down payment or sometimes even none. It’s the only loan that’s considered a 0% down payment program. Plus, there’s no PMI.
So you will just be paying principal plus interest.
The veteran has to have been discharged with good standing. A veteran or a spouse of the veteran can get a loan.
The VA also has something similar to FHA’s up-front mortgage insurance (UFMI) premium. The UFMI adds 1.75% of the base loan amount.
For the VA, they have the VA Funding Fee. It is the lowest for the first time using the loan. But if it is used again, it will go up.
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